This study confirms the idea that the impact of formal economic institutions on growth rates may vary depending on how such institutions emerge. Our paper demonstrates
that the relationship between legal rules and economic growth can be peculiar when these rules are created via revolutionary institutional change characterized by a top-down approach to institution building. This mode of institution emergence can create incompatibilities between the logic of the new formal institutions and existing cultures, on the one hand, and local economic structures, on the other hand. Since institution building is handled by politicians and occurs in the political sector, the quality of political institutions and political decision-making determines the quality of the new formal institutions and growth rates in the course of transition. Our analysis provides empirical evidence supporting both of these ideas. A weak political context leads to more extractive legal institutions that harm growth. High quality political institutions, in contrast, produce well defined and efficiently enforced formal institutions and enable rapid economic growth. Good political institutions are also more likely to detect and eliminate gaps in the logic of the new formal institutions and the two structures, thereby offsetting frictions in the economy caused by these incompatibilities and enabling the local economy to grow faster.
Drawing on this understanding of growth determinants during transition, we suggest that reforms begin with the political sector and aim to introduce robust political settings. When such political contexts are in place, the country can proceed with building new property rights and contract enforcement legislation while ensuring that this legislation is in tune with local cultures and economic structures. If this is not the case, structural policies and policies aimed at strengthening new modes of thinking should be introduced. In this way, transitions to new political and economic regimes may have more chances of success.
Future research is needed to eliminate three major limitations of our study. First, a more careful grouping of countries for both subsamples is necessary to eliminate stark heterogeneities in their political, economic, social, and historical characteristics. Second, one should consider integrating countries with unstable regime trends into the analysis.
Finally, alternative economic development measures should be used to demonstrate the robustness of our findings on the impact that the mode of institution building has on patterns of economic progress in the world.
Acknowledgement
We thank Stephanie Vogel for proof-reading the manuscript.
References
Acemoglu D., Johnson S., Robinson J.A. (2001), ‘The Colonial Origins of Comparative Development: An Empirical Investigation’, American Economic Review, 91(5), 1369–1401 Acemoglu D., Robinson J.A. (2012), Why Nations Fail: The Origins of Power, Prosperity and
Poverty, New York, Crown Publishers
Arellano M., Bover O. (1995), ‘Another Look at the Instrumental Variable Estimation of Error-Component Model’, Journal of Econometrics, 68, 29–51
Arjona R., Ladaique M., Pearson M. (2002), ‘Social Protection and Growth’, OECD Economic Studies, 35, 7–45
Aslund A. (2007), How Capitalism was Built: The Transformation of Central and Eastern Europe, Russia and Central Asia, Cambridge, Cambridge University Press
Barro R. (1997), Determinants of Economic Growth: A Cross-Country Empirical Study, Cambridge, MA, MIT Press
Berg A., Borensztein E., Sahay R., Zettelmeyer J. (1999), ‘The Evolution of Output in Transition Economies: Explaining the Differences‘, IMF Working Paper WP/99/73, International Monetary Fund
Blundell R., Bond S. (1998), ‘Initial Conditions and Moment Conditions in Dynamic Panel Data Models’, Journal of Econometrics, 87(1), 115–143
Boettke P.J., Coyne C.J., Leeson P.T. (2008). ‘Institutional Stickiness and the New Development Economics’, American Journal of Economics and Sociology, 67(2), 331–358 Bosworth B., Collins S. (2003), ‘The Empirics of Growth: An Update’, Brookings Papers
on Economic Activity, 2, 113–206
Boudreaux K., Alicia P.D. (2007), Paths to Property: Approaches to Institutional Change in International Development, London, Institute of Economic Affairs
Chavance B. (2008), ‘Formal and Informal Institutional Change: The Experience of Postsocialist Transformation’, European Journal of Comparative Economics, 5(1), 57–71 Chen B., Feng Y. (1996), ‘Some Political Determinants of Economic Growth: Theory
and Empirical Implications’, European Journal of Political Economy, 12(4), 609– 627
Davis D. (2010), ‘Institutional Flexibility and Economic Growth’, Journal of Comparative Economics, 38(3), 306–320
De Melo M., Denizer C., Gelb A., Tenev S. (1997), ‘Circumstances and Choice: The Role of Initial Conditions and Policies in Transition Economies’, World Bank Policy Research Working Paper No. 1866, World Bank
Dementiev V., Vishnevskiy L. (2011), ‘Pochemu Ukraina ne Innovatsionnoe Gosudarstvo: Institutsionalniy Analiz’, Ekonomitseskaya Teoria (‘Why Ukraine is not an Innovative State: Institutional Analysis’, Journal of Econometric Theory), 3, 5–20
Easterly W. (2008), ‘Design and Reform of Institutions in LDCs and Transition Economies. Institutions: Top Down or Bottom Up?’, American Economic Review: Papers and Proceedings, 98(2), 95–99
Efendic A., Pugh G., Adnett N. (2011), ‘Institutions and Economic Performance: A Meta-Regression Analysis’, European Journal of Political Economy, 27(3), 586–599
Eggertsson T. (1997), ‘The Old Theory of Economic Policy and the New Institutionalism’, World Development, 25(8), 1187–1203
Eicher T., Leukert A. (2009), ‘Institutions and Economic Performance: Endogeneity and Parameters Heterogeneity’, Journal of Money, Credit and Banking, 41(1), 197–218 Eicher T., Schreiber T. (2010), ‘Structural Policies and Growth: Time Series Evidence
from a Natural Experiment’, Journal of Development Economics, 91(1), 169–179
Falcetti E., Raiser M., Sanfey P. (2000), ‘Defying the Odds: Initial Conditions, Reforms and Growth in the First Decade of Transition’, EBRD Working Paper No. 55, European Bank for Reconstruction and Development
Fidrmuc J. (2003), ‘Economic Reform, Democracy and Growth during Post-Communist Transition’, European Journal of Political Economy, 19(3), 583–604
Fidrmuc J., Tichit A. (2009), ‘Mind the Break! Accounting for Changing Patterns of Growth during Transition’, Economic Systems, 33(2), 138–154
Fischer S., Sahay R., Vegh, C.A. (1996), ‘Stabilisation and Growth in Transition Economies: The Early Experience’, Journal of Economic Perspectives, 10, 45-66
Groenewegen J., Kerstholt F., Nagelkerke A. (1995), ‘On Integrating New and Old Institutionalism: Douglass North Building Bridges’, Journal of Economic Issues XXIX(2), 467–475
Gwartney J., Lawson R., Sobel R.S., Leeson P.T. (2007), Economic Freedom of the World: 2007 Annual Report, The Fraser Institute, Economic Freedom Network Hall R., Jones C. (1999), ‘Why Do Some Countries Produce so Much more Output per
Worker than Others?’ Quarterly Journal of Economics, 114(1), 83–116
Jong-A-Pin, R. (2009), ‘On the Measurement of Political Instability and its Impact on Economic Growth’, European Journal of Political Economy, 25(1), 15–29
Klomp J., de Haan J. (2009), ‘Political Institutions and Economic Volatility’, European Journal of Political Economy, 25, 311–326
Knight, J. (1992), Institutions and Social Conflict, Cambridge, Cambridge University Press Kyriazis N., Zouboulakis M. (2005), ‘Modeling Institutional Change in Transition
Countries’, Communist and Post-Communist Studies, 38(1), 109–120
Lee K., Kim B.Y. (2009), ‘Both Institutions and Policies Matter but Differently for Different Income Groups of Countries: Determinants of Long-Run Economic Growth Revisited’, World Development, 37(3), 533–549
Mankiw N.G., Romer D., Weil D.N. (1992), ‘A Contribution to the Empirics of Economic Growth’, Quarterly Journal of Economics, 107(2), 407-437
Matthews R. (1995), ‘Darwinism and Economic Change’, in Collard D.A., Dimsdale N.H., Gilbert C.L., Helm D.R., Scott M.FG. and Sen A.K. (eds.), Economic Theory and Hicksian Themes, Oxford, Clarendon Press, 97–117
Matveenko M. (2005), ‘Modernizatsiya Institutov–Uslovie Ustoychivogo Ekonomitseskogo Rosta v Rossii’ (‘Institutional Modernization as Basis for Sustainable Economic Development in Russia’), Available at:
<http://noe.g4m.ru/conference_november_2007/matveenko_thesis.pdf>
Маu V. (2007), ‘Ekonomicheskaya Politika 2007 Goda: Uspehi i Riski‘, Voprosi Ekonomiki (‘Economic Policy in 2007: Successes and Risks‘, Economic Issues), 2, 23–38 McArthur J.W., Sachs, J.D. (2001), ‘Institutions and Geography: Comments on Acemoglu,
Johnson and Robinson (2000)’, NBER Working Paper No. 8114, National Bureau of Economic Research
Narayan P., Narayan S., Smyth R. (2011), ‘Does Democracy Facilitate Economic Growth or Does Economic Growth Facilitate Democracy? An Empirical Study of Sub-Sahara Africa’, Economic Modelling, 28(3), 900–910
Islam N. (2004), ‘Settler Mortality Rate as an Instrument for Institutional Quality’, Working Paper Series Vol. 2004-28, International Centre for the Study of East Asian Development
Nelson R., Sampat B. (2001), ‘Making Sense of Institutions as a Factor Shaping Economic Performance’, Journal of Economic Behavior and Organization, 44(1), 31–54 North D. C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge,
Cambridge University Press
Olson M. (1982), The Rise and Decline of Nations. Economic Growth, Stagnation and Social Rigidities, New Haven, CT, Yale University Press
Pääkkönen J. (2010), ‘Economic Freedom as Driver of Growth in Transition’, Economic Systems, 34(4), 469–479
Pejovich S. (1999), ‘The Effects of the Interaction of Formal and Informal Institutions on Social Stability and Economic Development’, Journal of Markets and Morality, 2(2), 164–181
Petrunya U., Ivashina A. (2010), ‘Institutsionalnie Faktori Ekonomitseskogo Razvitiya’, Ekonomicheskaya Teoria (‘Institutional Factors of Economic Development’, Economic Theory), 4, 24–31
Platteau J.-P. (1996), ‘The Evolutionary Theory of Land Rights as Applied to Sub-Saharan Africa: A Critical Assessment’, Development and Change, 27(1), 29–86
Polischuk L. (2008), ‘Nezelevoe Ispolsovanie Institutov: Prichini i Sledstviya’, Voprosi Ekonomiki (‘Non-Intentional Use of Institutions: Causes and Consequences’, Economic Issues), 8, 28–44
Polterovich V. (2005), ‘K Rukovodstvu dla Reformatorov: Nekotorie Vivodi iz Teorii Ekonomicheskih Reform’, Ekonomicheskaya Nauka Sovremennoy Rossii (‘For Reformers:
Some Conclusions from Theory of Economic Reforms’. Economic Science of Modern Russia), 1(28), 7–24
Polterovich V. (2008), ‘Strategii Modernizasii, Iinstituti i Coalisii’, Voprosi Ekonomiki (‘Modernization Strategies, Institutions and Coalition’, Economic Issues), 4, 4–24 Polterovich V., Popov V. (2006), ‘Evoluzionnaya Teoria Ekonomicheskoy Politiki’,
Voprosi Ekonomiki (‘Evolutionary Theory of Economic Policy-Making’, Economic Issues), 7, 4–22
Portes A. (2006), ‘Institutions and Development: A Conceptual Reanalysis’, Population and Development Review, 32(2), 233–262
Poznanski K. Z. (1995), ‘Institutional Perspectives on Post-Communist Recession in Eastern Europe’, in Poznanski K.Z. (ed.), The Evolutionary Transition to Capitalism, Boulder, CO, Westview Press, 3–30
Przeworski A., Limongi F. (1993), ‘Political Regimes and Economic Growth’, Journal of Economic Perspectives, 7(3), 51–69
Radygin A., Entov R. (2008), ‘V Poiskah Instituzionalnih Harakteristik Rosta’, Voprosi Ekonomiki (‘In Search of Institutional Factors of Growth’, Economic Issues), 8, 4–27 Rodrik D., Subramanian A., Trebbi, F. (2002), ‘Institutions Rule: The Primacy of Institutions
over Geography and Integration in Economic Development’, Working Paper W9305, National Bureau of Economic Research
Solow R. M., (1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70(1), 65–94
Tridico P. (2006), ‘Institutional Change and Governance Indexes in Transition Economies: The case of Poland’, European Journal of Comparative Economics, 3(2), 197-238 Vernikov A. (2009), ‘Corporate Governance Institutions in Russia: Import and Mutation’,
Working Paper No 15379, Munich Personal RePEc Archive
Yasin E. G. (2003), ‘Modernizatsia Ekonomiki i Sistema Tsennostey’ (‘Economy Modernization and Values System’), Available at:
<http://www.amicable.ru/library/yasin2003.pdf.>
Appendix 1. GDP per capita in the selected post-communist countries at the outset of transition (1990), in 1990 International Geary-Khamis dollars
Country GDP per capita
Albania 2,499
Armenia 6,066
Azerbaijan 4,639
Bulgaria 5,597
Croatia 7,351
Czech Republic 8,895
Estonia 10,820
Georgia 7,616
Hungary 6,459
Kyrgyz Republic 3,602
Latvia 9,916
Lithuania 8,663
Macedonia 3,972
Moldova 6,170
Poland 5,113
Romania 3,511
Russia 7,779
Serbia 5,011
Slovakia 7,763
Slovenia 10,860
Ukraine 6,027
Source: Maddison Historical GDP Data
Appendix 2. Description of country choice for the evolutionary and revolutionary subsamples
Country Choice Notes
Afghanistan Not included Recent history of military intervention Albania Included in the revolutionary sample
Algeria Not included Fluctuations in regime trend greater than 3 points
Angola Not included Insufficient change (the benchmark of 6 not
reached) Argentina Included in the revolutionary sample
Armenia Included in the revolutionary sample History of reverse trend but included due to the insufficient number of transition countries in the subsample
Australia Included in the evolutionary sample Resource rich Austria Included in the evolutionary sample
Azerbaijan Included in the revolutionary sample History of reverse trend but included due to the insufficient number of transition countries in the subsample
Bahrain Included in the evolutionary sample Resource rich
Bangladesh Included in the revolutionary sample Fluctuations in regime trend greater than 3 points but after 2006. Slightly insufficient starting point (slightly above -6)
Belarus Not included Recursive movement to autocracy
Belgium Included in the evolutionary sample Benin Included in the revolutionary sample
Bhutan Not included Fluctuations in regime trend greater than 3
points Bolivia Included in the revolutionary sample
Bosnia Not included No data on polity scores
Botswana Included in the evolutionary sample
Brazil Included in the revolutionary sample Profound political change occurs but in stages. Resource rich
Bulgaria Included in the revolutionary sample
Burkina Faso Not included Fluctuations in regime trend greater than 3 points
Burundi Not included Mixed change, difficult to classify
Cambodia Not included Insufficient and unstable change
Cameroon Included in the evolutionary sample
Canada Included in the evolutionary sample Resource rich
Cape Verde Not included Insufficient starting point for change (above -6)
Cen. Afr. Rep. Not included Insufficient change (the benchmark of 6 not reached)
Chad Not included Insufficient change
Chile Not included A lot of missing values on key variables
China Included in the evolutionary sample Resource rich Colombia Included in the evolutionary sample
Comoros Not included Fluctuations in regime trend greater than 3
points
Congo Not included Insufficient and unstable change
Costa Rica Included in the evolutionary sample
Croatia Included in the revolutionary sample Starting point of change is slightly above -6
Cuba Not included A lot of missing values on key variables
Cyprus Not included Insufficient history of regime trend
Czech Republic
Included in the revolutionary sample Denmark Included in the evolutionary sample
Djibouti Not included Insufficient change Dominican
Republic
Not included Fluctuations in regime trend greater than 3 points
Congo Kinshasa
Not included Insufficient change
East Timor Not included Insufficient history of regime trend available Ecuador Not included Insufficient starting point for change (above
-6) Egypt Included in the evolutionary sample
El Salvador Included in the revolutionary sample Change is in the early 1980s and is relatively durable
Equatorial Guinea
Included in the evolutionary sample
Eritrea Not included Insufficient history of regime trend available Estonia Included in the revolutionary sample
Ethiopia Not included Insufficient change
Fiji Not included Fluctuations in regime trend greater than three
points Finland Included in the evolutionary sample
France Included in the evolutionary sample
Gabon Not included Insufficient change
Gambia Not included Change is from democracy to autocracy
Georgia Included in the revolutionary sample Germany Included in the evolutionary sample
Ghana Not included Fluctuations in regime trend greater than 3
points Greece Included in the evolutionary sample
Guatemala Included in the revolutionary sample Full transition is reached but in two phases with few years apart
Guinea-Bissau Not included Unstable change
Guinea Included in the evolutionary sample Resource rich Guyana Included in the revolutionary sample Resource rich
Haiti Not included Fluctuations in regime trend greater than three
points
Honduras Not included Insufficient starting point for change (above -6)
Hungary Included in the revolutionary sample India Included in the evolutionary sample
Indonesia Included in the revolutionary sample Change is recent (around the year 2000)
Iran Not included Unstable change
Iraq Not included Recent history of military occupation
Ireland Included in the evolutionary sample Israel Included in the evolutionary sample Italy Included in the evolutionary sample
Ivory Cost Not included Insufficient change (the benchmark of 6 not reached)
Jamaica Included in the evolutionary sample Japan Included in the evolutionary sample
Jordan Not included Fluctuations in regime trend greater than 3
points
Kazakhstan Not included No transition to democracy
Kenya Not included Mixed change, difficult to classify
Korea North Not included A lot of missing values on key variables Korea South Included in the revolutionary sample Starting point for change is slightly above -6
Kosovo Not included Insufficient history of regime trend
Kuwait Not included
Kyrgyzstan Included in the revolutionary sample Insufficient change (the benchmark of 6 not reached) but included due to the insufficient number of transition countries in the subsample
Laos Not included Change is from democracy to autocracy
Latvia Included in the revolutionary sample
Lebanon Not included Recent history of military occupation
Lesotho Included in the revolutionary sample Change is around mid of 1990s. The country has recent experience with democracy.
Resource rich
Liberia Not included A lot of missing values on key variables
Libya Not included A lot of missing values on key variables
Lithuania Included in the revolutionary sample
Luxembourg Included in the evolutionary sample Marked as small economy Macedonia Included in the revolutionary sample
Madagascar Included in the revolutionary sample There is a reverse trend but after 2006 Malawi Included in the revolutionary sample
Malaysia Not included Fluctuations in regime trend greater than 3 points
Mali Included in the revolutionary sample
Mauritania Not included Fluctuations in regime trend greater than 3 points
Mauritius Included in the evolutionary sample
Mexico Included in the evolutionary sample Resource rich Moldova Included in the revolutionary sample
Mongolia Included in the revolutionary sample
Montenegro Not included Insufficient history of regime trend Morocco Included in the evolutionary sample
Mozambique Included in the revolutionary sample The upper benchmark of 6 is slightly not reached). Change is around mid of 1990s.
Myanmar Not included A lot of missing values on key variables
Namibia Not included Insufficient history of regime trend
Nepal Not included Fluctuations in regime trend greater than 3
points Netherlands,
the
Included in the evolutionary sample New Zealand Included in the evolutionary sample
Nicaragua Not included Mixed change, difficult to classify
Niger Not included Unstable change
Nigeria Not included Unstable change
Norway Included in the evolutionary sample Resource rich Oman Included in the evolutionary sample Resource rich
Pakistan Not included Fluctuations in regime trend greater than 3 points
Panama Included in the revolutionary sample
Papua N. G. Not included Insufficient history of regime trend Paraguay Included in the revolutionary sample
Peru Not included Fluctuations in regime trend greater than 3
points Philippines Included in the revolutionary sample
Poland Included in the revolutionary sample
Portugal Included in the evolutionary sample Change is shortly after 1970
Qatar Not included A lot of missing values on key variables
Romania Included in the revolutionary sample
Russia Included in the revolutionary sample Resource rich, Fluctuations in regime trend but retained for the analysis due to the
insufficient number of transition countries in the subsample
Rwanda Included in the evolutionary sample
Saudi Arabia Included in the evolutionary sample Resource rich
Senegal Not included A lot of missing values on key variables
Serbia Included in the revolutionary sample
Sierra Leone Not included Mixed change, difficult to classify Singapore Included in the evolutionary sample
Slovak Rep. Included in the revolutionary sample Slovenia Included in the revolutionary sample
Solomon Isl. Not included Insufficient history of regime trend
Somalia Not included Mixed change, difficult to classify
South Africa Not included Insufficient starting point for change (above -6)
South Sudan Not included No data on political trend are available
Spain Not included A lot of missing values on key variables
Sri Lanka Included in the evolutionary sample Mild fluctuations in regime trend
Sudan Not included Fluctuations in regime trend greater than 3
points
Suriname Not included No data on political trend are available
Swaziland Not included Mixed change, difficult to classify
Sweden Included in the evolutionary sample Switzerland Included in the evolutionary sample
Syria Included in the evolutionary sample Fluctuations in regime trend prior 1970
Taiwan Not included Change is in many stages
Tajikistan Not included Insufficient political change (the upper benchmark of 6 not reached)
Tanzania Not included Insufficient change
Thailand Not included Fluctuations in regime trend greater than 3 points
Togo Not included Insufficient change (the upper benchmark of
6 not reached) Trinidad Included in the evolutionary sample
Tunisia Included in the evolutionary sample There is change but gradual
Turkey Not included Fluctuations in regime trend greater than 3
points
Turkmenistan Not included No transition to democracy
UAE Not included Insufficient history of regime trend
Uganda Not included Fluctuations in regime trend greater than 3
points Ukraine Included in the revolutionary sample
United Kingdom, the
Included in the evolutionary sample United States,
the
Included in the evolutionary sample Resource rich
Uruguay Included in the revolutionary sample History of brief reverse trend shortly after 1970
Uzbekistan Not included No transition to democracy
Venezuela Not included Change is from democracy to autocracy
Vietnam Included in the evolutionary sample
Yemen Not included Fluctuations in regime trend greater than 3
points
Zambia Included in the revolutionary sample Brief history of reverse trend
Zimbabwe Not included Change is from democracy to autocracy
Note: List of countries is sourced from <http://www.systemicpeace.org/polity/polity4.htm>
Appendix 3. List of countries used in the analysis
Evolutionary subsamples Revolutionary subsamples
Base Extended Base Extended
Australia Australia Albania Albania
Austria Austria Armenia Argentina
Belgium Bahrain Azerbaijan Armenia
China Belgium Bulgaria Azerbaijan
Colombia Botswana Croatia Bangladesh
Costa Rica Cameroon Czech Republic Benin
Denmark Canada Estonia Bolivia
Finland China Georgia Brazil
Germany Colombia Hungary Bulgaria
India Costa Rica Kyrgyzstan Croatia
India Costa Rica Kyrgyzstan Croatia